Chandelier Exit

The Chandelier Exit, in finance is a technical analysis indicator used to determine the potential exit points for a trade. Traders and investors commonly use it to set stop-loss orders or identify when to close a position. It is primarily designed for trending markets and is especially useful in capturing trends while limiting losses during periods of market volatility.

The crucial objective of it is to manage risk effectively. The Chandelier Exit aims to set stop-loss levels appropriate for the current market conditions. During periods of higher volatility, the Chandelier Exit widens the distance between the stop-loss and the current price.

1. The Chandelier Exit is a technical indicator that helps traders implement a trailing stop-loss strategy by dynamically adjusting the stop-loss level based on market volatility. It allows traders to protect profits and limit potential losses while staying in a trade as long as the trend remains intact.
2. It is beneficial in trending markets, aiming to capture and follow price trends effectively. By trailing the stop-loss level and the price movement, traders can stay in profitable trades for extended periods.
3. The calculation allows traders to adjust their stop-loss levels based on current market conditions. This approach helps manage risk by widening the stop-loss during periods of high volatility and tightening it during low volatility.

The Chandelier Exit is a technical analysis indicator used in finance for trend-following and risk management purposes, by determining exit points for a trade. The Chandelier Exit indicator's origin is credited to Charles LeBeau and featured in his book "Computer Analysis of the Futures Markets," co-authored with David W. Lucas, published in 1992. Charles LeBeau is a respected trader and researcher known for his work on developing various trading systems and indicators.

It aims to identify potential exit points for long or short positions by calculating stop-loss levels dynamically based on market volatility. It helps traders to stay in a trade while a trend is intact and exit positions when the trend is likely to reverse.

In essence, the Chandelier Exit indicator differs from traditional fixed stop-loss orders by considering the average true range (ATR), which measures market volatility, and adjusting the stop-loss level accordingly. During high volatility, the stop-loss is placed further away from the current price to allow the asset's price to fluctuate without triggering a premature exit. Conversely, during periods of low volatility, the stop-loss is tightened to protect profits and limit potential losses.

Here's how one can use a trailing stop-loss strategy:

1. Identify the Trend: Before using a trailing stop-loss, determine the prevailing trend in the asset one wants to trade. This uses technical analysis tools like moving averages, trend lines, or other indicators.
2. Set Initial Stop-Loss: When one enters a trade, establish an initial stop-loss level based on risk tolerance and the price at which one is comfortable exiting the position if the business goes against it.
3. Implement the Trailing Stop: Once the trade starts moving in favor and the price begins to trend in the desired direction, adjust the stop-loss level to "trail" behind the price. The trailing stop is at a certain percentage or amount below the highest price reached.
4. Secure Gains: As the price favors, the trailing stop will move up (in a long trade) or down (in a short trade) to lock in profits. If the price reverses and hits the trailing stop, the trade will automatically close, protecting the gains made up to that point.
5. Let Profits Run: The key benefit of a trailing stop-loss is that it allows one to participate in significant price movements while protecting profits from sudden reversals. It lets one stay in a trade as long as the trend is strong, but it will trigger an exit once the trend weakens or reverses, limiting potential losses.
6. Monitor and Adjust: Continuously monitor the price action and adjust the trailing stop as the trend progresses. One may tighten the stop to lock in more profits or loosen it to give the trade more room to breathe.

In the TradingView chart given below, which is related to Palantir Technologies, the exit points are clearly visible. The upward trend market in green continues till the point is reached where the trend stops, and there is an indication of either the continuation of a ranging market or a downtrend. Similarly, the area marked in red line shows how the downtrend came to an end at the point marked as an exit because a ranging market resumed after that. For both cases, stop-loss can be put at a suitable level, depending on the risk appetite of the trader, so as to secure the profits. It is important to keep track of changes in the trend to identify such situations and take profitable trades. 

Source

Calculating the Chandelier Exit indicator involves three main components: the Highest High, the Average True Range (ATR), and a multiplier. Here is the formula:

Chandelier Exit = Highest High - (ATR * Multiplier)

Let's break down each component:

1. Highest High: This refers to the highest price of the asset over a specified period. Traders typically choose a specific lookback period, such as the last 22 days, to determine the highest high. It represents the highest point the asset's price reached during that period.
2. Average True Range (ATR): The ATR measures market volatility. It quantifies the average price range of the asset over a specified period, considering price gaps and intraday price fluctuations. The ATR calculation involves various methods. The most common calculation involves averaging the actual ranges for a given number of periods.
3. Multiplier: The multiplier is a constant factor determining the distance of the Chandelier Exit level from the highest high. Traders choose the multiplier based on their risk tolerance and trading strategy. The typical value for the multiplier is 3, but it adjusts to suit individual preferences.

To calculate the Chandelier Exit, one should subtract the product of the ATR and the multiplier from the highest high. This results in a dynamic trailing stop level that adjusts based on market volatility.

It's important to note that the Chandelier Exit formula assumes an uptrend. If you apply it to a downtrend, you would add the product of the ATR and multiplier to the lowest low instead of subtracting it.

Let us understand it better with the help of examples:

Example #1

Suppose a trader bought shares of a fictional company, XYZ Inc., at $100 per share. He used the Chandelier Exit indicator to set a trailing stop-loss level for this trade.

Here are the details:

• Highest High: In the last 20 days, the highest price reached by XYZ Inc. was $120.
• Average True Range (ATR): The 14-day ATR for XYZ Inc. is calculated to be $5.
• Multiplier: He decides to use a multiplier of 2.

Now, let's calculate the Chandelier Exit:

Chandelier Exit = Highest High - (ATR * Multiplier) 
Chandelier Exit = $120 - ($5 * 2) = $120 - $10 = $110

In this example, the Chandelier Exit level is at $110. As the price of XYZ Inc. rises and reaches new highs, adjust the Chandelier Exit to lock in profits and protect against potential reversals.

Example #2

Consider an example of a currency pair in the foreign exchange market, USD/EUR (US Dollar/Euro).

• Highest High: In the last 10 days, the highest exchange rate for USD/EUR was 0.9000 (meaning 1 USD = 0.9000 EUR).
• Average True Range (ATR): The 10-day ATR for USD/EUR is calculated to be 0.0025 (meaning an average price range of 0.0025 EUR over the past 10 days).
• Multiplier: Decide to use a multiplier of 1.5.

Now, let's calculate the Chandelier Exit:

Chandelier Exit = Highest High - (ATR * Multiplier) 

Chandelier Exit = 0.9000 - (0.0025 * 1.5)
= 0.9000 - 0.00375 = 0.89625 (rounded to four decimal places)

In this example, the Chandelier Exit level for the USD/EUR currency pair is at 0.89625. One should adjust the Chandelier Exit to protect profits and limit potential losses in USD/EUR trade as the exchange rate increases.

Here's a comparison between the two indicators:

This has been a guide to what is Chandelier Exit. Here, we explain how to use it, its formula, comparison with Chande Kroll Stop, and examples. You can learn more about it from the following articles -

• Accumulation/Distribution Indicator
• Technical Indicator
• Momentum Indicator